In: Finance
Company Q’s current return on equity (ROE) is 14%. It pays out one-half of earnings as cash dividends (payout ratio=0.5). The current book value per share is $50. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stays constant for the next four years. After that, competition forces ROE down to 11.5% and the payout ratio increases to 0.8. The cost of capital is 11.5%.